Business%20Ownership%20and%20Control

1
Business Ownership and Control

• Stakeholders and objectives
• Principle agent problem

2
Stakeholders and aims

• Stakeholders are groups who have an interest in
  the activity and performance outcomes of a
  business
• Shareholders
• Managers
• Employees
• Suppliers
• Customers
• Government and local communities.

3
Stakeholders and aims

• Different stakeholders tend to have different
  objectives e.g.. owners want maximum profits,
  customers lower prices and workers higher wages.
• Stakeholder conflict can ensue. Eg in public
  limited companies, ownership and control are
  separate owners seek maximum profits managers
  may seek sales maximisation as these increase
  their bonuses.

4
Divorce between Ownership Control

• The majority of shareholders in a quoted company
  (plc) cannot exercise day-to-day control over the
  decisions of managers
• Managers employed by a business may have
  different motivations than owners
• Managers may want to maximise their own utility
  from being in charge of a business
• This may lead to decisions that are not
  consistent with profit maximisation / or
  maximising shareholder value over time

5
Ownership and control
Principals Shareholders
Control Mechanisms Pressures from the stock
market Regular meetings with shareholders
(AGM) Performance related pay (to provide
incentives)
Agents Board of Directors Senior Management
6
Ownership, control influence
Principals Shareholders
Control Mechanisms Pressures from the stock
market Regular meetings with shareholders
(AGM) Performance related pay
Agents Board of Directors Senior Management
Other influences on business behaviour Consumers
e.g. ethical retailing Industry
regulators Government (taxation, trade policy etc)
7
Behavioural Theorists Managerial Discretion
Models

• Behavioural economists examine the decisions that
  are taken within complex business organisations
• Stakeholders are those with a vested interest in
  a business
• Employees
• Managers
• Shareholders (owners)
• Customers

8
Behavioural Theorists Managerial Discretion
Models

• Managers often have discretionary powers in
  deciding on price and output and marketing in
  different segments of markets
• Much depends on the degree of autonomy (freedom)
  that the head office of a business gives to its
  managers e.g. people employed in individual sales
  outlets
• Maximising behaviour may be replaced by
  satisficing I.e. setting minimum acceptable
  levels of achievement

9
Herbert Simon - The Satisficing Principle

• Satisficing Satisfy Suffice
• No business can process all the factors affecting
  the marketing/pricing of a product, in the hope
  of maximising profit
• This theory is known as bounded rationality
• The complexity of decision-making may lead to
  managers following rules of thumb rather than
  seek optimal decisions all of the time

10
Herbert Simon - The Satisficing Principle

• Agents (e.g. managers) face information costs in
  the present and uncertainty about the future
• This limits their decision-making ability and may
  force them to make decisions by seeking the first
  satisfactory solution rather than optimizing

11
The Principle Agent Problem

• The principal, hires an agent to perform tasks on
  his behalf but cannot ensure that the agent
  performs them in exactly the way the principal
  would like.
• The efforts of the agent are expensive and
  time-consuming to monitor
• Incentives of the agent may differ from those of
  the principal leading to a conflict of objectives
• It is linked to the problem of asymmetric
  information
• Unequal information share between two parties
• It does not arise if a legal contract can be
  drawn up to specify all the duties of the agent

12
Coping with the Principle Agent Problem

• It boils down to having the right incentives!
• Share-ownership schemes
• Performance-related pay
• (a) Incentive pay schemes e.g. profit sharing
• (b) Wages related directly to productivity /
  profitability
• Long-term employment contracts for senior
  management to give them a higher degree of
  loyalty to the business
• Generous non-financial rewards but based on /
  contingent on assessments of performance
• Regular performance reviews
• Increasing role played by activist hedge funds